Jack Deal and Laura McDonald

Jack Deal and Laura McDonald | January 27, 2013 |


Nothing Changes a Telecom Deal Like a Merger or Acquisition

Nothing Changes a Telecom Deal Like a Merger or Acquisition Those who don't plan can be quickly overwhelmed by a change and spend their time making bad decisions as they put out fires.

Those who don't plan can be quickly overwhelmed by a change and spend their time making bad decisions as they put out fires.

The forces of change are always at work as technology advances and markets fluctuate. But sudden and wrenching transformations are more commonly brought about by a "change event"--a merger, acquisition or divestiture ("M.A.D."). In the third quarter of 2012, merger and acquisition activity in the U.S. was approximately $195 billion.

When companies acquire or divest business units, they seldom think seriously about the impact on their telecom networks or contracts until weeks--or months--after closing. That's a mistake. This article explores how your company can take steps to protect its investments and minimize the adverse impact of a M.A.D. or, better still, take advantage of the event to improve your deals.

There are three stages in dealing with a M.A.D.. The first takes place when you are negotiating or extending telecom contracts before anyone has bought or sold anything--that is, how you position and protect yourself for any eventual M.A.D., even if no M.A.D. has been announced at the time you're contracting for telecom services (this is the pre- M.A.D. contract stage); the second, during the planning for the event (the due diligence stage); and the last, immediately after the event (the implementation stage). We'll consider each in turn.

The Contract Stage--Before You Get M.A.D.
Your company's ability to lessen the impact of a M.A.D. on your network and associated contractual relationships (or to leverage an event to your benefit) is strongest during the contracting process. Most companies are focused on the nuts and bolts (prices and services) of their contracts and therefore overlook this opportunity, or do not anticipate a M.A.D. and discount the need to address the possibility in advance. But change happens, and there are three key actions your company can take during the contract stage to prepare for an eventual M.A.D.:

* Control your commitments
* Handle your assignment clause with care, and
* Consider adding a change clause.

First, pay attention to your commitments. Most contracts have two forms of commitments: minimum revenue commitment(s) and individual circuit commitments.

If you know a possible divestiture is in the works, you should account for any downward projected spend and the disconnect of dozens/scores/hundreds of circuits. On the flip side, if you know of a potential acquisition, try to leverage the additional spend to increase your "cushion" (the amount by which commitment-eligible spending exceeds the minimum commitment), and resist any attempts to boost the commitment level. No one wants to explain to senior management that the company must take an unexpected hit in the form of shortfall charges because you made too large of a revenue commitment, in anticipation of a merger that ultimately fell through.

If the carrier is unwilling to let you reduce your commitment or you are unable to disclose a potential merger or articulate the impact of a divestiture, you can protect yourself through a clause that allows you to reduce your commitment in the case of a business downturn or divestiture of a business unit or subsidiary. You can also get the right (and it is much easier to get this right in advance) to allow a divested entity to continue to receive services under your contract for a period of time (typically a year) so that the transfer of that unit is smooth. Note that you'll probably be "on the hook" for that usage vis a vis the carrier, and should negotiate a side letter with the acquiring company to take responsibility.

Individual circuit commitments are a bit harder to address. Carriers love to impose terms on individual circuits, and many have standard contracts in which the circuit terms auto-renew. Those can wreak havoc in a M.A.D. because they create commitments that are not coterminous with each other or the contract, substantially reducing the ability to realize the expense reductions that follow services consolidation.

It is hard to get carriers to agree to the right to terminate a circuit without penalty because of a divestiture or acquisition; a better solution (smart in any event) is to keep circuit terms to a minimum and limit them to high capacity circuits (100 Mbps is a good threshold). When that is not possible, you can try to get a M.A.D. clause that addresses circuit terms, or a provision that allows a divested entity to take over a circuit without the divesting company incurring early termination liability. Another option is to seek a lower termination liability for circuit terminations that are due to a M.A.D. (this allows you to "share" the pain with the carrier).

Next page: Assignment clause and M.A.D. clause


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